in financial parlance--- mouman biswas
TRANSCRIPT
DESIGN OF EFFECTIVE SUPPLY
CHAIN
FOR
WORKING CAPITAL MANAGEMENT
Submitted by :
MOUMAN BISWAS
Enrollment number: 06Bs1858
ICFAI BUSINESS SCHOOL
HYDERABAD
BATCH OF 2006-2008
NAME OF THE ORGANIZATION:
KITCHEN APPLIANCES INDIA LIMITED
(VIDEOCON GROUP OF COMPANIES)
ICFAI Business School-Hyderabad
A REPORT ON
DESIGN OF EFFECTIVE SUPPLY CHAIN
FOR
WORKING CAPITAL MANAGEMENTSubmitted by :
MOUMAN BISWAS
Enrollment number: 06Bs1858
ICFAI BUSINESS SCHOOL
HYDERABAD
BATCH OF 2006-2008
A report submitted in the partial fulfillment of the requirements of MBA Program of
ICFAI Business School
Company Guide FACULTY GUIDE:
Mr. Siddhartha Sengupta Prof.S.N Mookherjee
MATERIALS MANAGER ICFAI BUSINESS SCHOOL
KAIL Kolkata
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ACKNOWLEDGEMENT:
I feel privileged to be associated with Videocon Group of companies, which
is one of the leading companies in manufacturing of consumer durables in
India. I deeply express my gratitude to Kitchen Appliances India Limited
for giving me an opportunity to work as a trainee in their manufacturing
unit at Salt Lake. I would like to give my sincere regards to Mr. Goutam
Sengupta, Vice President of Kitchen Appliances India Limited. Last 3
months has been a great learning experience for me, which will help me to
work in the corporate world.
I would like to thank Mr. Siddhartha Sengupta, Materials Manager of
Kitchen Appliances India Limited, for giving me his valuable time and
inputs needed for preparing this final report.
I am really grateful to my faculty guide Prof.S.N.Mookherjee whose
practical knowledge and experiences has helped me in understanding and
analyzing various aspects of this project.
I would convey my regards to Prof.Santanu Roy, Director of ICFAI
Business School, and Kolkata for giving me this opportunity.
Finally, I would also like to thank all the employees of KAIL for their kind
cooperation.
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TABLE OF CONTENTS:
Acknowledgement………………………………………………………………………..Pg.3Abstract………………………………………………………………………………………..Pg.5
1.) INTRODUCTION
About Videocon……………………………………………………………………………Pg.6
About Kitchen Appliances India Limited………………..................Pg.8
Brief idea about working capital…………………………………………..…Pg.10
Brief idea about supply chain………………………………………………..…Pg.12
Purpose of the project……………………………………………………………...Pg.16
Scope of study……………………………………………………………………….……Pg.18
Outline of the work……………………………………………………..…………….Pg.19
Limitation of the study……………………………………………………………..Pg.21
Source of data…………………………………………………………………………….Pg.23
Time schedule………………………………………………………………..……………Pg.24
2.) MAIN TEXT Pg.26
KAIL’s norms for inventory………………………………………..………….Pg.27
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Plan procedure…………………………………………………………………………..Pg.28
Importance of inventory in KAIL…………………… …………………..Pg.29
ABC analysis………………………….…………………………………………………..Pg.30
Existing inventory policy in KAIL for “A” items………………..Pg.34
Proposed inventory system ……………………………………………………Pg.37
Extra material holding..…………………………………………………………..Pg.52
Inventory policy for “B” & “C” items in KAIL…………………….Pg.60
Slow moving and non-moving materials…………………………………Pg.62
3) RECOMMENDATION……………………………………………………………………..…….Pg.63 4)
APPENDICES………………………………………………………………………
…………………..Pg.67
5)
REFERENCES………………………………………………………………………
…………………..Pg.74
ABSTRACT:
In today’s world manufacturers are faced with increased global
competition, more informed customers, increasingly complex supply
chains and the pressure of being first-to-market with the most
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innovative products. To maintain a globally competitive posture and to
cope with mounting pressure to improve productivity, while at the
same time reduce costs, manufacturing industry is to concentrate
much on the investment of working capital. And inventory is the most
integral portion of the working capital. Manufacturers need to be sure
that the relationship between suppliers, partners and distributors is
unimpeded by traditional stumbling blocks of time and location.
Kitchen Appliances India Limited is a wholly owned subsidiary of
Videocon manufactures wide range of products starting from
Televisions, refrigerators, washing machines, DVD players to micro
wave oven, air conditioners and etc. Its approximate investment in
inventories amounts to 10crores.So,it is crucial that KAIL should
develop and use various tools and technique so that it can achieve
optimum utilization of its resources.
In this Project report last 12months data i.e. April, 2006 to March,
2007 has been analyzed based on various inventory models and tools.
This project aims at understanding effective use of working capital
which will contribute to the operational efficiency of the organization;
optimum use will help to generate maximum returns.
Today, Videocon is household
name across the nation- India's No.
1 brand of Consumer Electronics & Home Appliances, trusted by over
50 million people to improve their quality of life.
Shri Nandlal Madhavlal Dhoot, the founder of the Videocon group in
early 80’s,through a technical tie up with Toshiba Corporation of
Japan, Videocon International Limited launched India’s first color
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Television. Today Videocon is the largest seller of big screen color
televisions in India and exports more than 1million color televisions.
Now the group operates through 4 key sectors :1.consumer durables
2.Thomson CPT 3.CRT glass 4.Oil and gas.
With a turnover exceeding Rs50 billion,18 manufacturing units and
more than 10000 employees ,the Videocon group has become a
market leader in manufacturing of consumer electronics and home
appliances.
Company’s product range is highly diversified-it makes Television, air
conditioner, VCRs, washing machine, refrigerator, microwave oven,
water purifier, audio system and many more.
LOGO LOGIC:
This is the new Videocon symbol. It reiterates the ethos of a company
dedicated to maintaining the highest international standards of
excellence through quality, technology and innovation. For over a
decade now, Videocon has been bringing the latest and very best in
Consumer Electronics and Home Appliances. Successfully adapting the
best of international technology to suit Indian needs, and crafting it to
improve the quality of life – as million of satisfied customers will agree.
The new symbol of Videocon asserts its passion for global impact, and
the two ‘E’s on either side represent the Group’s wide spectrum of
interests ranging from ‘Electronics to Energy’. Along with the steely
glint, this communicates the group's global ambition, its strength,
sterling credentials and innovative drive.
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VISION:
To bring happiness in every home with global presence offering high
quality products to ease & enrich human life.
MISSION:
To delight and deliver innovative products through ingenious
strategy, intrepid entrepreneurship, improved technology, insightful
marketing and inspired thinking about the future.
ORGANISATIONAL DETAILS:
NAME OF THE ORGANIZATION:
KITCHEN APPLIANCE INDIA LTD. (VIDEOCON GROUP OF COMPANIES)
Kitchen Appliances India Limited (KAIL) is a manufacturing unit in
Eastern India of Videocon Industries Ltd. It was set up in 1999 to
produce Consumer Electronics & Home Appliances products for
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Videocon, Akai, Hyundai, Sansui, Kenstar, Toshiba, Electrolux brands.
It’s product range starts from Televisions, refrigerators, washing
machines, DVD players to micro wave oven, air conditioners and etc. It
is the main plant in Eastern India which handles 20% of the total
demand.
It has its registered office at:-
171,Mittal Court
C-Wing,
Nariman point
Mumbai-400021.
KAIL has 26 branches in India. In West Bengal it has 3 such
manufacturing units.
At Salt Lake
At Taratala
At Siliguri
Its product range starts from television, air conditioner to micro wave
oven, refrigerator and many more. These varieties of products which
are manufactured in KAIL along with their brand name are listed as
follows:
SL No. Product type Brand Name
1. Color
Television
Videocon, Akai, Hyundai, Sansui,
Kenstar, Toshiba, Electrolux
2. Washing
Machine
Videocon, Kenstar. Electrolux
3. Refrigerator Videocon, Akai, Electrolux
4. Air conditioner Videocon, Akai ,Electrolux
5. Microwave
Oven
Kenstar
6. Audio, DVD Videocon, Akai, Sansui,Hyundai,Nest
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This project is carried on in the Salt Lake factory.
ADDRESS OF THE ORGANIZATION:
BLOCK-BP. SECTOR – V.
SALT LAKE CITY,
KOLKATA- 700091
In Salt Lake Factory mainly CTV i.e. color Television, Refrigerator, DVD
are manufactured.
A BRIEF IDEA ABOUT WORKING CAPITAL:
In a simple term, working capital may be defined as that part of capital
of an organization which is used to maintain its main operating
activities by means of a continuous rotation of capital employed for
this purpose. There are basically two concepts of working capital.
i) Gross working capital: This concept is the wider concept which
means that the summation of all its current assets is its working
capital.
ii) Net working capital: According to this net concept the difference
between the value total current assets and current liabilities is the
working capital.
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So in simple, Working capital is the firm’s investment in current
assets. Current assets are comprised of all the assets that the firm
expects to convert into cash within the year, including cash, accounts
receivable, inventories etc. Working capital management is the
process of planning and controlling the level and mix of the current
assets of the firm as well as financing these assets. The objective of
working capital management is to maintain the optimum balance of
each of the working capital components. Good management of working
capital is part of good financial management. Effective use of working
capital will contribute to the operational efficiency of an organization;
optimum use will help to generate maximum returns on their
investment.
Before going deep in to the project one must know how this working
capital circulates in different forms to generate revenue and profit.
The fact that working capital only amounts to a few months’ supply
means that the working capital cycle, a cycle running from cash to
inventories, inventories to work-in-progress, work-in-progress to
finished good finished goods to receivables and lastly receivables to
cash .
Working Capital Cycle
There are two elements in the business cycle that absorb cash -
Inventory (stocks and work-in-progress) and Receivables (debtors
owing you money). The main sources of cash are Payables (creditors)
and Equity and Loans.
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Each component of working capital (namely inventory, receivables and
payables) has two dimensions TIME and MONEY. When it comes to
managing working capital - TIME IS MONEY. If company can get money
to move faster around the cycle (e.g. collect monies due from debtors
more quickly) or reduce the amount of money tied up (e.g. reduce
inventory levels relative to sales), the business will generate more
cash or it will need to borrow less money to fund working capital. As a
consequence, company could reduce the cost of bank interest or will
have additional free money available to support additional sales
growth or investment.
A BRIEF IDEA ABOUT SUPPLY CHAIN:
A supply chain is a network of facilities and distribution options that
performs the functions of procurement of materials, transformation of
these materials into intermediate and finished products, and the
distribution of these finished products to customers. Supply chains
exist in both service and manufacturing organizations, although the
complexity of the chain may vary greatly from industry to industry and
firm to firm.
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An example of a very simple supply chain for a single product, where
raw material is procured from vendors, transformed into finished
goods in a single step, and then transported to distribution centers,
and ultimately, customers. Realistic supply chains have multiple end
products with shared components, facilities and capacities.
Traditionally, marketing, distribution, planning, manufacturing, and
the purchasing organizations along the supply chain operated
independently. These organizations have their own objectives and
these are often conflicting. Marketing's objective of high customer
service and maximum sales revenue conflict with manufacturing and
distribution goals. Many manufacturing operations are designed to
maximize throughput and lower costs with little consideration for the
impact on inventory levels and distribution capabilities. Purchasing
contracts are often negotiated with very little information beyond
historical buying patterns. The result of these factors is that there is
not a single, integrated plan for the organization---there were as many
plans as businesses. Clearly, there is a need for a mechanism through
which these different functions can be integrated together. Supply
chain management is a strategy through which such an integration can
be achieved.
Supply Chain Decisions:
We classify the decisions for supply chain management into two broad
categories -- strategic and operational. As the term implies, strategic
decisions are made typically over a longer time horizon. These are
closely linked to the corporate strategy and guide supply chain policies
from a design perspective. On the other hand, operational decisions
are short term, and focus on activities over a day-to-day basis. The
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effort in these type of decisions is to effectively and efficiently manage
the product flow in the "strategically" planned supply chain.
There are four major decision areas in supply chain management: 1)
location, 2) production, 3) inventory, and 4)distribution, and there are
both strategic and operational elements in each of these decision
areas.
Location Decisions:
The geographic placement of production facilities, stocking points, and
sourcing points is the natural first step in creating a supply chain.
Once the size, number, and location of these are determined, so are
the possible paths by which the product flows through to the final
customer. These decisions are of great significance to a firm since they
represent the basic strategy for accessing customer markets, and will
have a considerable impact on revenue, cost, and level of service
Production Decisions:
The strategic decisions include what products to produce, and which
plants to produce them in, allocation of suppliers to plants, which
plant to serve which customer market etc.As before, these decisions
have a big impact on the revenues, costs and customer service levels
of the firm. Operational decisions focus on detailed production
scheduling. These decisions include the construction of the master
production schedules, scheduling production on machines, and
equipment maintenance. Other considerations include workload
balancing, and quality control measures at a production facility.
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Inventory Decisions
These refer to means by which inventories are managed. Inventories
exist at every stage of the supply chain as either raw material, semi-
finished or finished goods. Their primary purpose to buffer against any
uncertainty that might exist in the supply chain. Since holding of
inventories can cost anywhere between 20 to 40 percent of their value,
their efficient management is critical in supply chain operations. It is
strategic in the sense that top management sets goals. However, most
researchers have approached the management of inventory from an
operational perspective. These include deployment strategies, control
policies - the determination of the optimal levels of order quantities
and reorder points, and setting safety stock levels, determining extra
material holding at each stocking location. These levels are critical,
since they are primary determinants of customer service levels.
Distribution Decisions:
How well a company can collaboratively manage the process of moving
goods from sourcing to the point of consumption in the market place.
It is concerned with the movement of a finished product/service to
customers. In physical distribution, the customer is the final
destination of a marketing channel, and the availability of the
product/service is a vital part of each channel participant's marketing
effort. It is also through the physical distribution process that the time
and space of customer service become an integral part of marketing,
thus it links a marketing channel with its customers (e.g. links
manufacturers, wholesalers, retailers).It also includes decisions
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related to transportation strategy, including frequency, routes, and
contracting.
PURPOSE OF THE PROJECT:
This project aims at exploring the efficient utilization of working
capital. As the title of the project suggests, there exits a close
relationship between supply chain and working capital management.
In a manufacturing industry a major component of the working capital
is inventory.
Out of the 4 major decision areas of supply chain management i.e. (i)
location, (ii) production, (iii) inventory, and (iv) Distribution, why
inventory has been considered for this project are discussed in detail
under the heading of scope of the study.
A lion’s share of the working capital is required for procurement of raw
material, component, work-in-progress. The concept of supply chain
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management is very much required to understand the effective
utilization of working capital investment in inventory. This project aims
at exploring the efficient utilization of working capital in inventories.
Project is undertaken to determine the required amount of investment
of working capital in inventories. A huge amount of money is tied up in
holding inventory. This project will be concentrating on CTV i.e. Color
Television. which holds more than 50% of the market and Value wise it
captures 80% of the total business. In this plant 90% of the production
capacity is used for manufacturing of CTV. Average monthly
production of CTV is approximately 30,000. For manufacturing CTV raw
materials are procured from outside. In this category they have more
than 70 models of televisions. Mainly these raw materials can be
classified into 4 broad categories. These are 1) picture tube, 2) front
cover & back cover 3) electronics and 4) packaging. For procurement
of such raw materials it requires to invest approximately 10crores per
month, which is a main portion of the working capital in KAIL.
While it is necessary to keep a certain amount of materials on hand to
satisfy the needs of customers, both commercial and consumer, its
required to maintain a balanced view of how much is too much. If it
has a lot of extra bulk in its inventory, it runs several risks. First of all,
it cuts into company’s net worth, showing as excess stock that is not
moving. Also, large quantities of stock mean that some of it could
become outdated or even expire, if any of it is perishable. Keeping the
minimum amount of stock necessary increases its bottom line and
reduces waste. It also allows you to provide a greater number of
products and respond more quickly, aiding in meeting the next goal of
good supply chain management. So, proper inventory management is
important to the financial health of the organization. On the one hand
out of inventories leads to interruption in production process,
therefore results in loss of sale on the other hand too much inventory
holding results in large inventory carrying cost in terms of opportunity
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cost of foregone interest; warehousing costs; damage and pilferage;
obsolescence; insurance etc. So, it is utmost essential to effectively
manage this important component of the cash cycle .Poor inventory
management results in illiquidity.
SCOPE OF THE STUDY:
Out of the 4 major decision areas of supply chain management i.e. (i)
location, (ii) production, (iii) inventory, and (iv)Distribution, area of
inventory has been considered for this project.
The reason for selecting inventory is as follows:
This project is carried at KAIL’s Salt lake factory, which is one of
the manufacturing plants of Videocon Group of companies. Both
location and production decisions are strategic in nature.
Generally these decisions are controlled by the Head office from
Aurangabad. So, its not a feasible area where any sort of analysis
can be made.
KAIL is a manufacturing unit. In case of Distribution decision
Videocon’s marketing division takes the responsibility of selling
the products, which are manufactured here to the ultimate
consumers.
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In a manufacturing unit like KAIL one of the key areas is
managing inventories, which is also an important part of supply
chain management. Inventories constitutes major portion of the
working capital. Effective use of working capital will contribute to
the operational efficiency of an organization; optimum use will
help to generate maximum returns on their investment.
Considering all the factors in the organization, inventory seems to be
one of the most crucial component of working capital as well as a
feasible area to analyze further for the aforesaid project.
OUTLINE OF THE WORK:
A substantial amount of working capital is mainly tied up in
holding these inventories. Specially, this project aims at
determining what quantities of inventories the company should
hold at any point of time. Working capital can be acquired
piecemeal to meet immediate needs as they arise that is Just-in-
Time (JIT). Such policy has advantage of reducing the average
investment in working capital, thereby minimizing the interest
charges, insurance expenses and storage cost associated in
holding the inventories. But this policy has its own
disadvantages. There will be increased ordering cost, problem in
maintaining independence in operation and variation in product
demand, inflexibility in production scheduling etc.
This project aims at exploring the efficient utilization of working
capital in inventories. Project is undertaken to determine the
required amount of investment of working capital in inventories,
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which is to be planned according to the production plan of the
specific month. It can also find out the redundant or extra holding
of material.
The fact that working capital only amounts to a few months’
supply means that the working capital cycle, a cycle running from
cash to inventories, inventories to work-in-progress, work-in-
progress to finished good finished goods to receivables and lastly
receivables to cash .So, it is utmost essential to control the
inventory in such a manner so that it provides maximum number
of inventory turns with lesser amount of working capital. More
the number of turns in a year, more the amount generated by
investing the same amount of working capital.
From a company’s point of view, excess working capital means
operating inefficiencies. In addition, unnecessary working capital
increases the amount of the capital charge. Currently, cost of
capital is 14%. The objective of this project is to maintain the
optimum balance of each of the working capital components. This
project’s aim will be to reduce unnecessary blockade of working
capital and reduce cost of on such investment.
Value of this each class of components should be well classified
according to ABC analysis. As per ABC classification items are
classified on the basis of their annual consumption value in an
organization. However, it is important to keep an overall
perspective. It is not cost-effective to closely manage a large
number of low value inventory lines, nor is it necessary. A usual
feature of inventories is that a small number of high value lines
account for a large proportion of inventory value. So , control
should be imposed on the basis of the value of these items.
ABC analysis helps to identify non-moving and slow moving
items included in inventory stock, where working capital is
unnecessarily tied up. They occupy space and consume carrying
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cost. These materials must be identified and must be taken care
of as soon as possible.
On the other hand, safety stock of each class of these
components is to be fixed up according to the value of these
items. High value item generally holds low percent of safety
stock.
Analytical review of inventories can help to identify areas where
inventory management can be improved. Slow moving items,
continual stock outs, obsolescence, stock reconciliation problems
and excess spoilage are signals that stock lines need closer analysis
and control.
LIMITATIONS OF THE STUDY:
Data tabulation and collation is a long stretched activity and
continuous updating in bill of material of each set makes the
process all the difficult. Therefore, the bill of material has to be
frozen at a certain point of time and further calculation is to be
done on the basis of those data collected up to that point of time.
As per the company policy sometimes few confidential data is not
disclosed.
KAIL is one of the important manufacturing units of Videocon
group. It is the main plant in Eastern India which handles 20% of
the total demand. In KAIL the production plan are given by Head
Office. In such situation KAIL has little flexibility to implement
any change at its own.
KAIL sends its account to the head office where it is prepared
taking all the units together. So, it is not possible to get the
individual financial results of this plant. In such situation various
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important data which were required for the analysis remained
unanswered.
KAIL is a manufacturing unit. It does not get the sale proceeds of
the goods which are produced here. It only gets that portion of
sale proceeds which is invested by KAIL i.e. cost of producing
those goods. Being a cost centre it runs on no profit-no loss
basis. So, it becomes difficult task to calculate return on
investment or return on total assets etc.
Because of time constraint it is not possible to go further deep
into the analysis.
From the various related websites financial data which has been
downloaded gives a picture of financial position of the Videocon
Appliances as a whole which includes all the products under the
brand name of Videocon that are manufactured by different units
across the country. So, analyzing current asset and current
liabilities position becomes an impossible task to accomplish
within such a short time span.
SOURCE OF DATA:
PRIMARY SOURCE:
Videocon is India’s first company to successfully implement my SAP
ERP version 2004.The primary source of data was the company
documents. This data includes all the data related with the
production quantity and value , bill of material, stock value and
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quantity, each month’s production plan etc. These data are fed in to
Microsoft Excel to facilitate easy tabulation and calculation.
SECONDARY SOURCE:
The secondary source are the different books, articles and
journals on supply chain, working capital management and
inventory control and their inter connection. Apart from this,
various research papers from internet have been studied to get
an idea to make analysis on the right path.
SCHEDULE:
This project includes several steps to accomplish the purpose of this
project successfully. During these 14 weeks training period various
time schedules has been framed to avoid any sort of delay,
postponement or interruption in project work. To give a brief idea
about the schedule there are couple of things which are highlighted
below.
LITERATURE STUDY:
Review and study of some literature which includes journals, company
documents, power point presentation, and various articles has been
done during the first couple of weeks of the project. This helps to
understand the data and meaningfully convert them into valuable
information to make further analysis on it.
INTRODUCTION WITH THE SAP SYSTEM:
KAIL uses my SAP since December, 2005 where the company stores all
its data and information. Some training has been given to learn how to
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work on SAP, extract data from the company database and put into
Excel to make necessary calculation & analysis.
STUDY OF RESEARCH PAPER:
Various Research paper has been studied to find the close link
between the supply chain and working capital management. This has
been done continuously through out the project period to get an idea
to make analysis on the right path.
STUDY OF KAIL’S EXISTING INVENTORY SYSTEM:
Continuously study has been done to study the KAIL’s existing
inventory policy. Also an effort has been made to compare the existing
system with the proposed one.
MAKING ANALYSIS IN TWO PHASES:
For this project financial year 2006-2007 has been taken into
consideration. Last 12 months data has been analyzed here. In the
first phase from April to September were analyzed and then rest was
taken care of. This analysis was completed by the first week of May.
FINAL ANALYSIS AND PROJECT FINAL REPORT:
For last couple of weeks are utilized for careful and vivid study of the
project and reach to a conclusion. So that valuable points can be
brought to the notice.
PREPARATION OF FINAL PRESENTATION:
Last few days of project period would be utilized for the preparation of
the final presentation. Total work done in the project is expected to be
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presented in the presence of company guide and faculty guide as per
the time schedule.
MAIN TEXT:
Videocon is the largest seller of Big Screen Color Televisions in India
and exports more than 1 million Color Televisions per year. Its monthly
revenue generated by sale of only CTV is Rs. 150 crores. 10% of this
revenue comes from the sale of CTV which are produced in this KAIL’s
Salt Lake factory.
In financial parlance, inventory is defined as the sum of the value of
raw materials, components, fuels and lubricants, spare parts,
maintenance consumables, semi processed materials and finished
goods at any point of time. The operational definition of inventory
would be the amount of raw materials, fuel and lubricants, spare parts
and semi processed materials to be stocked for the smooth running of
the business. Since, these resources are idle when kept in the store,
inventory is defined as an idle resources of any kind having an
economic value.
Inventories are maintained basically for the operational smoothness
which they can effect by uncoupling successive stages of production,
whereas the monetary value of inventory serves as a guide to indicate
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the size of the investment made to achieve this operational
convenience. The material management department is expected to
provide this operational convenience with a minimum possible
investment in inventories. The objectives of inventories, operational
and financial , needless to say, are conflicting. The material
department is responsible for both stock outs as well large investment
in inventories. The solution lies in exercising a selective control and
application of inventory control techniques.
NORMS FOR INVENTORY IN KAIL:
The norms for inventory could be set by either the top management or
the material management department. The top management usually
sets monetary limits for investment in inventories. The material
management department has to allocate this investment to the
various items and ensure smooth functioning of company.
KAIL produces approximately 70 models of Color televisions every
month. For producing such huge variety of models almost 2000 types
of materials are used. So, where such variation of materials exits it
would be worthwhile if the materials are classified on the basis of their
values. So that management can focus their attention and effort where
investment is highest.
KAIL’S EXISTING INVENTORY POLICY:
KAIL produces variety models of color televisions for Videocon.
Product categories are
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14”, 20” conventional
15” TFT
21” conventional
21” TFT
21” slim
25” flat & conventional
29” flat
Chassis type:
70%= POC > Philips one chip
20%=TSB2 > Toshiba
6%= GIII > a version of Philips IC
4%=>MOC
PLAN PROCEDURE:
Plan is sent by VIDEOCON .Generally it sends 3monthly rolling plan.
Like in January the plan is of next 3months, it includes plan for Jan,
Feb and March.
Again in February plan, it includes plan for Feb, March, April.
In this plan they include picture tube size and chassis type and size.
Based on this chassis type KAIL can calculate the requirement for each
material (from BOM).
Every 20th of the month, Videocon Industries marketing division
depending on the market situation confirms KAIL’s production
schedule for the next month. If any change is to be made, it again
sends a revised plan to KAIL.
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ICFAI Business School-Hyderabad
KAIL’s total production can be classified in the following manner:-
10%= 29”
40%=21’ True Flat Television
5%=20”/21” conventional
40%= 15”True Flat Television
5%=14” conventional
Why Inventory is so important in KAIL for manufacturing
CTV:
This project will be concentrating on CTV i.e. Color Television which
holds more than 50% of the market and Value wise it captures 80% of
the total business. Average monthly production of CTV is
approximately 30,000.
In a manufacturing industry like Videocon, a large portion of working
capital is required to acquire its inventories. On an average it requires
to invest 10 crores per month to finance theses inventories.90 % of the
total cost is spent to get the materials.5% accounts for wage payments
and other direct cost .Rest 5% is for payment of various overhead
charges which includes factory overhead and administrative expenses.
Break up of total cost for manufacturing a CTV:
Inventory=90%
Waged and other direct Cost=5%
Overhead=5%
KAIL does not have to bear the cost of selling and distribution
overhead. The reason behind it is that KAIL is a manufacturing unit of
Videocon which manufactures various types of consumer durables.
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ICFAI Business School-Hyderabad
KAIL directly can not sell the product to the consumers. After
production, finished goods are dispatched to the marketing division of
Videocon in Kolkata, which takes the responsibility of marketing those
goods in the market. KAIL dose not get the sale proceeds of the goods
which are produced here. KAIL only gets that portion of sale proceeds
which is invested by KAIL i.e. cost of producing those goods. Being a
cost centre KAIL’s main aim should be minimization of total cost.
ABC ANALYSIS:
ABC analysis is a basic analytical management tool which enables top
management to place the effort where the results will be greatest.
This technique is popularly known as ALWAYS BETTER CONTROL. The
annual consumption values help the management to exercise selective
control and focus its attention only on a few items when there are
lakhs of items in stores. The annual consumption value analysis of any
organization would indicate that a handful of top high value items-less
than 10% of total number-will account for a substantial portion of
about 75% of the total consumption value, and these few vital items
are called “A” items which need careful attention of the management.
Similarly a large amount of bottom items over 70 % of the total
number called the trivial many-account only for about 10% of the
consumption value and are known as the “C” class. The items that lie
between the top and bottom are called the “B” category.
However, it is important to keep an overall perspective. It is not cost-
effective to closely manage a large number of low value inventory
lines, nor is it necessary. A usual feature of inventories is that a small
number of high value lines account for a large proportion of inventory
value. So , control should be imposed on the basis of the value of
these items. ABC analysis helps to identify non-moving and slow
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ICFAI Business School-Hyderabad
moving items included in inventory stock, where working capital is
unnecessarily tied up. They occupy space and consume carrying cost.
These materials must be identified and must be taken care of as soon
as possible.
METHODS FOLLOWED FOR ABC ANALYSIS:
For ABC analysis last 24 months data has been considered.
Downloaded the each months’ production plan from the system
Copy the product code from the production plan & feed into my
sap to get the Bill of Material. After that data are used to make a
model matrix against each month’s plan.
Using this model matrix each items consumption quantity is
calculated.
Multiplying the quantity with MAP (moving average price) value
of these items are calculated.
Now, these data are used to classify the materials in to A, B, C
category.
Here, consumption value of each items for the last 24 months’ i.e April
2005 to March,2007 has been taken into consideration.
After analyzing I tried to identify the various categories of items used
in production process. It has been shown in a tabular form.
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ICFAI Business School-Hyderabad
To give a more real picture here 3month’s consumption value has been
selected where there is fluctuation in the consumption value
depending on the market situation.
February,2007 when consumption value is high depending on the
market situation.
March, 2007 when consumption value is moderate
CATEGORY ITEMS
A Picture tube, buffer, packing box,
front cover, back cover, tuner, FBT,
speaker, Remote, SMPS
B Mains cord, IC,MICON, heat sink,
transistor
etc.
C Resistor, CFR, Tape , Felt,coil,
screw, header ,
Fuse, diode, knob, sticker etc.
TOTAL A B C
VALUE
(in
crores)
14.04 10.53 2.11 1.4
(In %) 75% 15% 10%
Quantity 1791 101 181 1509
(In %) 5.60% 10.10% 84.25%
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ICFAI Business School-Hyderabad
December, 2006 when consumption value is low.
TOTAL A B C
VALUE
(in
crores)
10.37 7.77 1.55 1.03
(In %) 75% 15% 10%
Quantity 1461 74 141 1246
(In %) 5.06% 9.65% 85.20%
TOTAL A B C
VALUE
(in
crores)
6.93 5.19 1.047 .693
(In %) 75% 15% 10%
Quantity 1402 80 143 1179
(In %) 5.70 % 10.19% 84.09%
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ICFAI Business School-Hyderabad
ABC ANALYSIS
0102030405060708090
A B C
VA
LU
E,Q
UA
NT
ITY
VALUE
QUANTITY
EXISTING INVENTORY POLICY FOR EACH OF THE
“A”CATEGORY ITEMS IN KAIL:
PICTURE TUBE
Videocon is the only manufacturer of CRT glass shells for CPT i.e. color
picture tube and controls 80% of the CPT production across the world.
Videocon sends this picture tube according to the next month’s plan
from Aurangabad or directly from manufacturing centers to KAIL. Since
Videocon has control on manufacturer of CPT in India,there is no
problem for supply of CPT to KAIL .The CPT is received in the lot of full
truck load. On an average KAIL holds 15 days stocks of CPT in hand.
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ICFAI Business School-Hyderabad
These 15 days stock includes 7 days transit time from Aurangabad to
Kolkata.
CKD kit (complete knocked down kit)
CKD kit contains various types of materials which are sold together as
a kit. CKD kit is sent by Videocon from Aurangabad or directly from the
manufacturer. The items included in that kit come from the overseas
sources like EAST KIT ELECTRONIC MANUFACTURING CO. LTD from
China. EAST KIT along with their own manufactured materials, acquires
different materials from different countries across the world (like
transistor from Taiwan, IC.MICON from Malayasia,opto-coupler from
Japan etc) & after export worthy packing it is despatched directly to
KAIL and other companies. So, in this case as materials are procured
from different part of the world so it is quite obvious to place the order
for CKD long before the actual requirement arises.
Here in KAIL it goes for 3months rolling plan. Approximately it gives an
idea to the manufacturer about their expected requirement for the
next 3months.According to that they initiate procurement &
production plan. Delivery depends on the schedule given by KAIL to
the manufacturer. In case there is less requirement of CKD in a specific
month they carry forward the balance to the next month and if there
are more requirements in the next month then this balance gets
adjusted.
KAIL’s stock policy in case of CKD is 5to 7days holding.
It is procured in bulk of 5000 or 10000. 2 to 3 such consignments in a
month meet the demand. This material takes little space to store. This
company deals with volume. So it goes for capacity booking. For
sophisticated item like CKD it generally goes for FCL i.e. full container
loading.
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ICFAI Business School-Hyderabad
CKD items=FBT, tuner, SMPS, Remote etc in A items.
FRONT COVER AND BACK COVER:
Front cover and back cover are supplied by Videocon directly from
Aurangabad. So, Videocon sends it as per the production schedule .It
is sent from Aurangabad in lot sizes of 1500 to 1600 depending on full
truck load quantity. Since F/C, B/C occupy lot of space, chassis assy.
Production schedule is finalized on the basis of availability of F/C, B/C.
KAIL’s stock policy for F/C &B/C is JIT (just in time) but it is not always
possible to maintain JIT policy since materials come from distant place.
Regarding front cover and back cover approximately is 15 day’s
holding which includes 7 days holding for obsolete items. Since they
are dependant on model and size of the CTV they become obsolete
within a very short span of time.
PACKING BOX:
Packing box is supplied by the local suppliers. But the raw material,
paper, which are used to produce these packing boxes are procured
from North India by the vendor. So sufficient time is given to the
supplier before delivery date. Generally by 15th of each month next
month’s requirement for packing box is forecasted to them and 80% of
which are confirmed by KAIL. Based on that forecast, suppliers start
production but delivery the same according to the schedule given by
KAIL. Supply is strictly maintained “JUST IN TIME”. Materials come in
lot size of 100 to 1000 units.
BUFFER:
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ICFAI Business School-Hyderabad
Buffer is procured from local supplier. As it occupies space, orders
depend on the monthly plan as and when basis. Company stock policy
is “JUST IN TIME” but since company produces 60 +/- 5 types of CTV
models in a month about 7 day’s stock is kept. Generally 7days prior
notice is given to the suppliers.
SPEAKER:
Speakers are purchased from North India. For producing each unit of
CTV 2 units of speakers are required. In some models 4 units of
speakers are required. There exists long term yearly agreement with
the suppliers. As it occupies very little space KAIL orders in bulk. Order
size varies from 15000 to 16000.So there are 4 to 5 orders per month.
PROPOSED INVENTORY STRATEGY:
To formulate an inventory strategy first the cost and the
characteristics of the items should be considered.
This project aims at exploring the efficient utilization of working
capital in inventories. Project is undertaken to determine the required
amount of investment of working capital in inventories, which is to be
planned according to the production plan of the specific month. It can
also find out the redundant or extra holding of material. The fact that
working capital only amounts to a few months’ supply means that the
working capital cycle, a cycle running from cash to inventories,
inventories to work-in-progress, work-in-progress to finished good
finished goods to receivables and lastly receivables to cash .So, it is
utmost essential to control the inventory in such a manner so that it
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ICFAI Business School-Hyderabad
provides maximum number of inventory turns with lesser amount of
working capital. More the number of turns in a year, more the amount
generated by investing the same amount of working capital.
From a company’s point of view, excess working capital means
operating inefficiencies. In addition, unnecessary working capital
increases the amount of the capital charge. The objective of working
capital management is to maintain the optimum balance of each of the
working capital components.
Inventory management is an important aspect of working capital
management because inventories themselves do not earn any
revenue. Holding either too little or too much inventory incurs costs.
Costs of carrying too much inventory are:
♠ Opportunity cost of foregone interest; warehousing costs; damage
and pilferage; obsolescence; insurance etc.
Costs of carrying too little inventory are:
♠ Stock out costs: lost sales; delayed service etc.
Ordering costs:
♠freight; order administration; loss of quantity discounts etc.
Carrying costs can be minimized by making frequent small orders but
this increases ordering costs and the risk of stock-outs. Risk of stock-
outs can be reduced by carrying "safety stocks" (at a cost) and re-
ordering ahead of time.
EOQ ASSUMPTIONS :
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ICFAI Business School-Hyderabad
1. Demand for the item is known and constant.
2. Lead time is known and constant. (Lead time is the amount of
time that elapses between when the order is placed and when it
is received.)
3. The cost of all units ordered is the same, regardless of the
quantity ordered (no quantity discounts).
4. Ordering costs are known and constant (the cost to place an
order is always the same, regardless of the quantity ordered).
5. When an order is received, all the items ordered arrive at once
(instantaneous replenishment).
6. Since there is certainty with respect to the demand rate and the
lead time, orders can be timed to arrive just when we would have
run out. Consequently the model assumes that there will be no
shortages.
Based on the above assumptions, there are only two costs that will
vary with changes in the order quantity,
(1) The total annual ordering cost and
(2) The total annual holding cost. Shortage cost can be ignored
because of assumption 6. Furthermore, since the cost per unit of all
items ordered is the same, the total annual item cost will be a constant
and will not be affected by the order quantity.
EOQ SYMBOLS:
D = annual demand (units per year)
S = cost per order (Rupees per order)
H = holding or carrying cost per unit per year (Rupees to carry one
unit in inventory for one year)
Q = order quantity
CLASSIC ECONOMIC ORDER QUANTITY (EOQ) MODEL
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ICFAI Business School-Hyderabad
The only costs that need to be considered for the EOQ model are the
total annual ordering costs and the total annual holding costs. These
can be quantified as follows:
ANNUAL ORDERING COST
The annual cost of ordering is simply the number of orders placed per
year times the cost of placing an order. The number of orders placed
per year is a function of the order size. Bigger orders means fewer
orders per year, while smaller orders means more orders per year. In
general, the number of orders placed per year will be the total annual
demand divided by the size of the orders. In manufacturing unit like
KAIL, the order cost would include the time to initiate the work order,
time associated with picking and issuing components excluding time
associated with counting and handling specific quantities, all
production scheduling time, machine set up time, and inspection time.
In short,
Total Annual Ordering Cost = (D/Q) S
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ICFAI Business School-Hyderabad
ANNUAL HOLDING COST
The annual cost of holding inventory is a bit trickier. If there was a
constant level of inventory in the warehouse throughout the year, we
could simply multiply that constant inventory level by the cost to carry
a unit in inventory for a year. Unfortunately the inventory level is not
constant throughout the year, but is instead constantly changing. It is
at its maximum value (which is the order quantity, Q) when a new
batch arrives, then steadily declines to zero. Just when that inventory
is depleted, a new order is received, thereby immediately sending the
inventory level back to its maximum value (Q). This pattern continues
throughout, with the inventory level fluctuating between Q and zero.
To get a handle on the holding cost we are incurring, we can use the
average inventory level throughout the year (which is Q/2). The cost of
carrying those fluctuating inventory levels is equivalent to the cost
that would be incurred if we had maintained that average inventory
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ICFAI Business School-Hyderabad
level continuously and steadily throughout the year. That cost would
have been equal to the average inventory level times the cost to carry
a unit in inventory for a year. In short,
Total Annual Holding Cost = (Q/2)H
TOTAL ANNUAL COST
The total annual relevant inventory cost would be the sum of the
annual ordering cost and annual holding cost, or
TC = (D/Q)S + (Q/2)H
This is the annual inventory cost associated with any order size, Q.
METHODS FOLLOWED FOR CALCULATING OF EOQ IN KAIL:
Here this EOQ model has been used to help in controlling the
working capital investment in inventories efficiently. The best
ordering strategy requires balancing the various cost factors to
ensure the organization incurs minimum inventory costs.
In the simplest form of this EOQ model assumes the annual
demand or usage for a particular item is known with certainty.
Here in KAIL average annual demand of CTV can be taken as
300000 units.
It also assumes that orders to replenish the inventory of an item
are filled instantaneously. Given a known demand and a zero lead
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ICFAI Business School-Hyderabad
time for replenishing inventories , there is no need for a company
to maintain additional inventories or safety stock to protect itself
against stock out.
But in actual practice when competition is so intense it is not
feasible to run a business without maintaining any safety stock.
Because, instant replenishment of inventories is not a realistic
assumption. According KAIL’s policy for “A” category items, an
quantity equal to 5% of monthly demand of each item is kept as a
safety stock.
In this analysis keeping the safety stock norms according to KAIL
I have tried find out average holding of each materials and cost
associated with holding of these materials.
In case of finding out of average inventory holding safety stock
has been taken into consideration.
42
Avg. Inventory=Q/2
Without any Safety stock
ICFAI Business School-Hyderabad
Average inventory holding=(Order size+ safety stock)/2
EOQ
Each of this “A” items has been analysed separately and also
compared to the KAIL’s existing policy.
In finding out total cost of holding inventory per annum material
cost remains same. Because, it has been observed that on such a
large scale production price negotiation with the suppliers is
done on yearly agreement basis. Any discounts or rebate in price
has already been adjusted.
PICTURE TUBE:
For producing 1unit of CTV 1unit of picture tube is required. So, its
annual demand can be taken as 300000units.
Annual
demand
Ordering
cost p.u
Carrying
cost (%)
Price(in
Rs)
Carrying
cost(in Rs)
EOQ
(units)
KAIL’s
Order
43
Avg. Inventory
Safety Stock
ICFAI Business School-Hyderabad
size(units)
PIC
TUBE
300000 360 20 1800 360 775 800
**safety stock=average monthly consumption*5%
Here, Safety stock for picture tube=(300000/12)*5%
=1250 units
* Average inventory= (Order size +safety Stock)/2
Pic
Tube
Annual
demand
Order
Size
No of
orders
Ordering
cost
(OC)
Carrying
cost
p.u(CC)
Safety
stock**
Avg
inventory*
Total
carrying
cost
Total
OC&CC
EOQ 300000 775 387 139355 360 1250 1013 364500 503855
KAIL 300000 800 375 135000 360 1250 1025 369000 504000
Difference in Cost:
KAIL’s policy As per EOQ Model difference
503855 504000 145
From the above calculation it is observed that the order size under
KAIL’s existing policy and proposed policy are more or less same which
leads to a very negligible amount of difference in total cost i.e
Rs145.So, there is no need to change the existing policy.
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ICFAI Business School-Hyderabad
BUFFER:
For producing 1unit of CTV 1unit of buffer is required. So, its annual
demand can be taken as 300000units.
Annual
demand
Ordering
cost p.u
Carrying
cost (%)
Price(in
Rs)
Carrying
cost(in Rs)
EOQ
(units)
KAIL’s
Order
size(units)
Buffer 300000 360 35 50 17.5 3513 1000
**safety stock=average monthly consumption*5%
Here, Safety stock for buffer =(300000/12)*5%
=1250 units
* Average inventory= (Order size +safety Stock)/2
Buffer Annual
demand
Order
size
No of
orders
Ordering
cost
(OC)
Carrying
cost
p.u(CC)
Safety
stock**
Avg
inventory*
Total
carrying
cost
Total
OC&CC
EOQ 300000 3513 85 30600 17.5 1250 2382 41685 72285
KAIL 300000 1000 300 108000 17.5 1250 1125 19688 127688
Difference in Cost:
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ICFAI Business School-Hyderabad
KAIL’s policy As per EOQ Model difference
127688 72285 55403
Although the cost under proposed method is much less than KAIL’s
existing policy, but considering other important factors it will be
advisable to follow the existing policy.
The reasons behind it are highlighted as follows:
Buffer is procured from local supplier So, lead time is much less
in this case. So, no need to go for large order size.
Moreover, it occupies space. So, large stocking of buffer will lead
to higher carrying cost. Company stock policy in this case
i.e“JUST IN TIME” would be the appropriate one.
PACKING BOX:
For producing 1unit of CTV 1unit of packing box is required. So, its
annual demand can be taken as 300000units.
Annual
demand
Ordering
cost p.u
Carrying
cost (%)
Price(in
Rs)
Carrying
cost(in Rs)
EOQ
(units)
KAIL’s
Order
size(units)
Packing
Box
300000 360 20 150 30 2683 1000
**safety stock=average monthly consumption*5%
Here, Safety stock for packing box = (300000/12)*5%
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ICFAI Business School-Hyderabad
=1250 units
* Average inventory= (Order size +safety Stock)/2
Packing
Box
Annual
demand
Order
Size
No of
orders
Ordering
cost
(OC)
Carrying
cost
p.u(CC)
Safety
stock**
Avg
inventory*
Total
carrying
cost
Total
OC&CC
EOQ 300000 2683 112 40320 30 1250 1967 59010 99330
KAIL 300000 1000 300 108000 30 1250 1125 33750 141750
Difference in Cost:
KAIL’s policy As per EOQ Model Difference
141750 99330 42420
Packing box is supplied by the local suppliers. In KAIL Supply of
packing Box is strictly maintained by “JUST IN TIME” system. But in
case of ordering in lot sizes of 1000units there are several number of
orders to be placed in a year which leads to increase in ordering cost.
On the other hand, although carrying cost according to the proposed
system of ordering is higher than the existing one. But in total of
ordering and carrying cost are much less than existing policy. So, sit
will be recommendable to change the existing policy to avoid the
unnecessary blocking of working capital.
FRONT COVER:
For producing 1unit of CTV 1unit of front cover is required. So, its annual demand can be taken as
300000units.
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ICFAI Business School-Hyderabad
Annual
demand
Ordering
cost p.u
Carrying
cost (%)
Price(in
Rs)
Carrying
cost(in Rs)
EOQ
(units)
KAIL’s
Order
size(units)
Front
cover
300000 360 30 175 52.5 2028 0
**safety stock=average monthly consumption*5%
Here, Safety stock for front cover= (300000/12)*5%
=1250 units
* Average inventory= (Order size +safety Stock)/2
Front
Cover
Annual
demand
Order
size
No of
orders
Ordering
cost
(OC)
Carrying
cost
p.u(CC)
Safety
stock**
Avg
inventory*
Total
carrying
cost
Total
OC&CC
EOQ 300000 2028 148 53280 52.5 1250 1639 86048 139328
KAIL 300000 1600 188 67680 52.5 1250 1425 74813 142493
Difference in Cost:
KAIL’s policy As per EOQ Model Difference
142493 139328 3165
BACK COVER:
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ICFAI Business School-Hyderabad
For producing 1unit of CTV 1unit of back cover is required. So, its
annual demand can be taken as 300000units.
**safety stock=average monthly consumption*5%
Here, Safety stock for Back cover=(300000/12)*5%
* Average inventory= (Order size +safety Stock)/2
Annual
demand
Ordering
cost p.u
Carrying
cost (%)
Price(in
Rs)
Carrying
cost(in Rs)
EOQ
(units)
KAIL’s
Order
size(units)
Back
cover
300000 360 30 175 52.5 2028 1600
=1250 units
Difference in Cost:
KAIL’s policy As per EOQ Model Difference
142493 139328 3165
AS calculation for front cover and back cover are same the analysis for
them also would be same. From the above table it can be seen that
there are not major differences in the order size. In KAIL’s policy
ordering costs are bit higher than the proposed system; but as front
cover and back cover occupies space this difference in ordering cost
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ICFAI Business School-Hyderabad
gets adjusted with the increase in carrying cost under EOQ model. So,
as a whole there are hardly any difference in total cost.
SPEAKER:
For producing 1unit of CTV 2units of speakers are required.
So, its annual demand can be taken as (300000units*2)
=600000units.
Annual
demand
Ordering
cost p.u
Carrying
cost (%)
Price(in
Rs)
Carrying
cost(in Rs)
EOQ
(units)
KAIL’s
Order
size(units)
Speaker 600000 360 20 70 14 5555 15000
**safety stock=average monthly consumption*5%
Here, Safety stock for picture tube=(600000/12)*5%
=2500 units
Speake
r
Annual
demand
Order
Size
No of
orders
Ordering
cost
(OC)
Carrying
cost
p.u(CC)
Safety
stock**
Avg
inventory*
Total
carrying
cost
Total
OC&CC
EOQ 600000 5555 108 38880 14 2500 4028 56392 95272
KAIL 600000 15000 40 14400 14 2500 8750 122500 136900
* Average inventory= (Order size +safety Stock)/2
Difference in Cost:
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ICFAI Business School-Hyderabad
KAIL’s policy As per EOQ Model Difference
136900 95272 41628
It is clearly seen that there is a huge difference in two order size. As a
result, there is a significant difference in total cost. Although under
proposed methodology cost is much less but after taking other market
variables into consideration KAIL’s policy is the most suitable one. The
reasons behind it are highlighted as follows:
Competition in the market so intense that sometimes supply of
speakers may fall short of such huge demand in the market. So in
such situation KAIL goes for strategic stock policy for speakers
which means build stock to avoid competition.
Speakers are very delicate and fragile material .So when it is
brought from the suppliers’ place it is transported in a delicate
transport in bulk. Because it can not be transported with other
materials in order to avoid damage of such brittle materials.
EXTRA MATERIAL HOLDING:
Further I have continued my studies by finding out the extra holding of
materials which lies in the hands of the company above its stock
holding policy. This showed that where unnecessary working capital
has been blocked. Here last 6months data has been taken to find extra
holding of inventory.
METHODOLOGY FOLLOWED FOR CALCULATING EXTRA HOLDING OF THE
MATERIALS:
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ICFAI Business School-Hyderabad
To find out the extra holding of each material, the stock at the
beginning of each month has been collected from the company
data base.
According to company stock norms an average inventory holding
is maintained on the basis of per day consumption. Like in case of
picture tube KAIL holds 15days consumption. For “A” category
material this has been shown in a tabular form.
Material Holding in
days
Picture tube 15days
Buffer 7days
Packing box 7days
Front cover 15days
Back cover 15days
Speaker 30days
The production figure for the above said period has been taken
for finding out the actual requirement of these materials
according to its plan schedule.
Production figure has been shown in a tabular form.
MONTH PRODUCTN
OCT,06 17296
NOV,06 16663
DEC,06 16468
JAN,07 21089
FEB,07 22689
MARCH,07 24229
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ICFAI Business School-Hyderabad
Comparing the actual requirement with the company stock
finds the extra holding for that particular material.
Dividing the extra material holding by per day consumption
gives extra holding in terms of days.
PICTURE TUBE:
Stock policy: 7days holding
For making 1set of CTV 1unit of picture tube is required. Multiplying
the production figure with 1,monthly requirement of material has been
derived.
Extra holding of Picture Tube
-5
0
5
10
15
20
25
Oct,06
Nov,06
Dec,06
Jan,
07
Feb,0
7
Mar
ch,0
7
Month
Ext
ra s
tock
in
no
of
day
s co
nsu
mo
tio
n
Picture Tube
Like in case of picture tube KAIL holds 15days consumption. It shows
wide fluctuation in holding of picture tube. This is because of the fact
that there is seasonal variation in the demand for CTV. In September
production figure was quite high. It reached 37000 units of production
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ICFAI Business School-Hyderabad
during the Puja season, which is the biggest festival in Eastern region.
Again when market goes down stock figures proves to be much higher
than the actual requirement. This continued for next 2 months also.
When in January production figure rises there was no extra holding of
material. Rather it became a negative figure. But, positive note is that
control was imposed properly and extra holding was reduced and very
close to the perfect position in the month of March.
BUFFER:
Stock policy: 7 days holding
For making 1set of CTV 1unit of buffer is required. Multiplying the
production figure with 1, monthly requirement of material has been
derived.
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ICFAI Business School-Hyderabad
Extra holding of buffer
0
2
4
6
8
10
Oct,06
Nov,06
Dec,06
Jan,
07
Feb,0
7
Mar
ch,0
7
Month
Ext
ra s
tock
in
no
of
day
s co
nsu
mp
tio
nBuffer
In case of buffer stock position is much under control. In the month of
October and November although stock is higher than the requirement,
in January its just the perfect figure. In following months also control
was there. So, here working capital blockage is much less than the
picture tube.
Packing Box:
Stock policy: 7days holding
For making 1set of CTV 1unit of packing box is required. Multiplying
the production figure with 1monthly requirement of material has been
derived.
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ICFAI Business School-Hyderabad
Extra holding of Packing Box
01
23
45
67
8
Oct,06
Nov,06
Dec,06
Jan,
07
Feb,0
7
Mar
ch,0
7
Months
Ext
ra s
tock
in
no
of
day
s co
nsu
mp
tio
n
Packing Box
In case of packing box position is much under control. In the month of
October and November although stock is little higher than the
requirement; but, in January its just the perfect figure. In following
months also control was there. So, here working capital blockage is
much less than the picture tube.
Front Cover and Back cover:
Stock policy: 15 days holding
For making 1set of CTV 1unit of front cover and 1unit of back cover are
required. Multiplying the production figure with 1, monthly
requirement of material has been derived.
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ICFAI Business School-Hyderabad
Extra holding of F/C & B/C
05
1015202530
Oct,06
Nov,06
Dec,06
Jan,
07
Feb,0
7
Mar
ch,0
7
Months
Ext
ra s
tock
in
no
of
day
s co
nsu
mp
tio
n
F/C
B/C
In case of front cover and back cover holding of material was
quite high in the first 2 months. KAIL’s stock policy for front
cover and back cover is JIT (just in time) but it is not always
possible to maintain JIT policy since materials come from distant
place. Regarding front cover and back cover approximately is 15
day’s holding which includes 7 days holding for obsolete items.
Since they are dependant on model and size of the CTV they
become obsolete within a very short span of time. So, according
to the market demand and customer preference model changes
so frequently that it leads to accumulation of stock of obsolete
materials. These are to be disposed off as soon as possible.
Speakers:
Stock policy: 30 days holding
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ICFAI Business School-Hyderabad
For making 1set of CTV 2units of speaker is required. Multiplying the
production figure with 2, monthly requirement of material has been
derived.
Extra holding of Speakers
0
5
10
15
20
25
Oct,06
Nov,06
Dec,06
Jan,
07
Feb,0
7
Mar
ch,0
7
Months
Ext
ra s
tock
in
no
of
day
s co
nsu
mp
tio
n
Speakers
Through out the 6months speakers holding are much higher than the
actual requirement. The reason behind it can be cited as follows:
Competition in the market so intense that sometimes supply of
speakers may fall short of such huge demand in the market. So in
such situation KAIL goes for strategic stock policy for speakers
which means build stock to avoid competition.
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ICFAI Business School-Hyderabad
Speakers are very delicate and fragile material .So when it is
brought from the suppliers’ place it is transported in a delicate
transport in bulk. Because it can not be transported with other
materials in order to avoid damage of such brittle materials.
“B” AND “C” CATEGORIES OF MATERIALS:
In KAIL there is hardly any difference in the stock policy for “B” and
“C” category of materials.
Inventory monitoring approaches for “B” & “C” categories of items:
Continuous Review or fixed order quantity system (Q-system):
This approach maintains a constant order size but allows the time
between the placements of order to vary. This method of monitoring
inventory is sometimes referred to as Perpetual Review system. When
the inventory level reaches the reorder level, an order is placed. On
hand inventory serves as order trigger(R).This type of system provides
closer control over inventory items since the inventory levels are
under perpetual scrutiny.
“B” categories of items are Mains cord, IC, MICON, heat sink ,
transistor etc.
“C” categories of items are Resistor, CFR, Tape, Felt, coil, screw,
header, Fuse, diode, knob, sticker etc.
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ICFAI Business School-Hyderabad
Periodic Review or Fixed-order period system (P-system):
This approach maintains a constant time between the placements of
order, but allows the order size to vary. This method of monitoring
inventory is sometimes referred to as a fixed interval system or fixed
periods of time. The amount that is ordered at a particular time point
is the difference between current inventory level and a predetermined
target inventory level. If the demand has been low during the prior
time interval, inventory levels will be relatively high and the amount to
be ordered will be relatively low.
KAIL follows combination of both the P and Q methods for its B and C
category materials. Periodic review is made monthly for each and
every material. Along with that if it finds stock level of any material
reaches the reorder level an order is triggered.
Average material holding for these materials is 1month’s.
NON-MOVING AND SLOW MOVING INVENTORIES:
Materials that are not consumed for a long period of time
approximately for 6months are known as non-moving materials.
Similarly materials that are consumed very slowly and in small
quantities in the production process is known as slow moving
materials. Whereas , those materials and equipments that are not
damaged and which have economic worth but are no longer useful for
the company’s operation owing to reasons such as change in product
line are known as obsolete materials. Non-moving and slow-moving
materials occupy space and carrying cost. In KAIL the slow-moving
materials are first identified. Then they are taken under observation
for the next 3months.If the material still remains as it is then they are
called non-moving materials. Then for the next 3monthsagain these
materials are taken under observation .Finally if still remain non-
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ICFAI Business School-Hyderabad
moving and are no longer needed for production of any other set then
these materials are termed as obsolete materials.
RECOMMENDATION:
Color Picture Tube:
They are the most important and the most critical item in the
complete process. They are received directly from the
manufacturers and are not dependant on the models. They are
received on a monthly order basis in a continuous flow KAIL’s
existing policy of ordering picture tube is almost same with the
EOQ model. So, there is no need to change the present method.
An important aspect here is that since the picture tubes are
very fragile they have a high rate of breakage and a high rate of
goods is returned as rejected lots. Proper care should be taken
to deal with the large number of rejections in every received lot.
(Rejection list has been given in the Appendices- , pg no. 73)
Again in case extra material holding picture tube’s stock is
much higher than the actual requirement, where a large portion
of working capital unnecessarily is tied up. So ,management
should immediately take some control measure to reduce this
holding level.
BUFFER:
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ICFAI Business School-Hyderabad
Although the cost under proposed method is much less than KAIL’s
existing policy, but considering other important factors it will be
advisable to follow the existing policy.
The reasons behind it are highlighted as follows:
Buffer is procured from local supplier So, lead time is much less
in this case. So, no need to go for large order size.
Moreover, it occupies space. So, large stocking of buffer will lead
to higher carrying cost. Company stock policy in this case i.e
“JUST IN TIME” would be recommended.
Extra material holding of buffer is under control, so no such
recommendation for buffer.
FRONT COVER ND BACK COVER:
There are not major differences in the order size between KAIL’s
existing policy and new system. In KAIL’s policy ordering costs
are bit higher than the proposed system; but as front cover and
back cover occupies space this difference in ordering cost gets
adjusted with the increase in carrying cost under EOQ model.
So, as a whole there are hardly any difference in total cost .
In case of front cover and back cover holding of material was
quite high in the first 2 months. So , strict control on such stock
is highly recommended.
Since they are dependant on model and size of the CTV they
become obsolete within a very short span of time. Stock policy
for front cover and back cover should be JIT (just in time).
PACKING BOX:
Packing box is supplied by the local suppliers. In KAIL Supply of
packing Box is strictly maintained by “JUST IN TIME” system.
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ICFAI Business School-Hyderabad
But in case of ordering in lot sizes of 1000units there are
several numbers of orders to be placed in a year which leads to
increase in ordering cost. On the other hand, although carrying
cost according to the proposed system of ordering is higher
than the existing one. But in total of ordering and carrying cost
are much less than existing policy. So, it will be recommendable
to change the existing policy to avoid the unnecessary blockage
of working capital.
SPEAKERS:
There is a huge difference in two order size. As a result, there is a
significant difference in total cost. But considering the following
factors KAIL’s existing policy will be recommendable
Competition in the market so intense that sometimes supply of
speakers may fall short of such huge demand in the market. So
in such situation KAIL goes for strategic stock policy to avoid
stock out position.
But proper care should be taken to reduce the huge extra
holding of speakers.
“B” AND “C” CATEGORY OF MATERIALS:
Orders are placed every month with a holding of 1month’s stock.
These types of materials are required for manufacturing almost all
type of CTV. So, their monthly requirement is almost confirmed.
In such case, instead ordering every month KAIL can order in bulk for 2
or 3 months consumption. As a result, time and cost both can be saved
from monthly review of stock.
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ICFAI Business School-Hyderabad
But considering the following factors KAIL’s existing policy will be
recommendable:
In case of huge stock of these materials there is high possibility
of mishandling material, which may result in wastage, misuse,
rejection etc.
Moreover, accumulation of 2 /3months stock will be very space
consuming as well. It will lead to increase in carrying cost.
Depending upon the market demand and customer preference
model and size of the television change so frequently that any
time the stock of material can be obsolete.
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ICFAI Business School-Hyderabad
APPENDICES:ABC Analysis:Details of each of the “A”items:
CO
MP
ON
EN
T
DE
SC
RIP
TIO
N
UO
M
MA
P
TO
TA
L
VA
LU
E
PIC TUBE 1100008119 PICTUBE,21"TFT,YAMMED,GENERIC PC 1,687.80 10075 170045851100008928 PIC TUBE,15"CTV,YAMMED,GENERIC PC 1,577.02 5375 84764831100008931 PIC TUBE,29"CTV,TFT,YAMMED,GENERIC PC 3,983.95 1295 51592161100008117 PIC TUBE,21"CTV,YAMMED,GENERIC PC 1,622.20 2884 46782741100008116 PIC TUBE,14"CTV,YAMMED,GENERIC PC 995.23 3450 34335441100008144 PIC TUBE,20"CTV,YAMMED,GENERIC PC 1,569.92 1900 29828481100017234 PIC TUBE,25"CTV,TFT,GENERIC PC 2,651.04 825 21871081200001322 ASSY,PICTURE TUBE,21"TFT PC 2,190.71 619.9 1358060
45280117FRONT COVER
1200003648 FRONT COVER,22 NP,HY GREY+VD SILVER PC 157.29 2752 4328221200003664 FRONT COVER,PANASONIC-21"/22NP,HIPS L G PC 123.72 2600 3216721200001567 FRONT COVER,3643QS,PEARL GREY(JK2000) PC 123.91 2200 2726021200005623 FRONT COVER,5502QS,VD SILVER PC 186.95 1350 2523831200001568 FRONT COVER,3643QS/3653QS,HIPS BLACK PC 102.33 2200 2251261200001910 FRONT COVER,5502QS,HIPS,LIGHT GREY PC 161.27 1350 2177151200004775 FRONT COVER,HY21C01,BURNISH SILVER PC 157.8 1366 2155651200008175 FRONT COVER,15SL,INTR.SER,MINT BLUE,VD S PC 104.46 2000 2089201200001039 ASSY,FRONT COVER,HY29FW01 PC 1,101.15 175 1927011200011812 FRONT COVER,HY22F07,B.SILVER+SANSUI BLAC PC 172.01 1096 188606
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ICFAI Business School-Hyderabad
1200004931 FRONT COVER,HY21C01,HIPS LIGHT GREY PC 119.09 1500 1786351200014036 FRONT COVER,K2K21,SANSUI BLACK+SILVER PC 157.41 1084 1706201200005042 FRONT COVER,5443QS,UNPTD,LIGHT GREY PC 151.58 1102 1670521200006628 FRONT COVER,K2K21",HIPS LIGHT GREY PC 122.15 1325 1618491200012958 FRONT COVER,HY22F08,AKAI SILVER PC 159.87 1000 1598701200008266 FRONT COVER,HY22F01T,HIPS LIGHT GREY PC 102.65 1546 1586991200003644 FRONT COVER,15SL,SONY,NEW,HIPS, LIGHT GR PC 78.71 2000 1574201200012962 FRONT COVER,HY22F08,HIPS BLACK PC 140.72 1089 153256
1200001599FRONT COVER,HR2K-WT,MET.SILVR+AKAI S.GRY PC 201.71 751 151452
1200001598 FRONT COVER,HR29,HIPS LIGHT GREY PC 221.51 675 1496151200010992 FRONT COVER,15NP,VD SILVER+HY.GREY.CRET PC 96.23 1525 1467221200001933 FRONT COVER,HARDROCK2000, HIPS L GREY PC 163.56 843 1379321200001587 FRONT COVER,FIRST20DP-P,BURNISH SILVER PC 113.87 1200 1366441200011968 FRONT COVER,K2K21DTH,B.SILVER+S.BLACK PC 156.91 861 1351341200001603 FRONT COVER,HY22FW01,BURN SILV+HY GREY PC 190.46 700 1333221200005619 FRONT COVER,7641QS,VD SILVER PC 251.25 530 1330591200011528 FRONT COVER,HY22F07,HIPS LIGHT GREY PC 131.48 1000 1314801200008174 FRONT COVER,22SL,INTR.SER,MINT BLUE,VD S PC 146.05 900 1314451200003939 FRONT COVER,IS29G,HIPS LIGHT GREY PC 167.58 783 1312471200003874 FRONT COVER SUPER-14,HIPS,LIGHT GREY PC 93.64 1388 1300181200011815 FRONT COVER,S2S21,SILVER/UV BLACK PC 159.23 767 1221851200003650 FRONT COVER,5153QST,PEARL GREY PC 165.8 700 116060
1200003669FRONT COVER,SY21SUPEREYEP,BURNISH SILVER PC 171.29 675 115621
1200001915 FRONT COVER,7631QS,HIPS LIGHT GREY PC 236.38 484 114329
1200003666FRONT COVER,SY14SUPEREYEP,BURNISH SILVER PC 120.92 900 108828
1200001902 FRONT COVER,21X50,HIPS LIGHT GREY PC 169.8 634 1077101200001946 FRONT COVER,SUPER21/TECHNO21,HIPS L GY PC 142.87 675 96437
6264749BACK COVER
1200003592 BACK COVER,22SL/NP,C2C21/B2B21,HIPS M GY PC 200.52 6075 12181591200011111 BACK COVER,B2B21,SANSUI BLACK PC 223.64 5175 11573371200000653 BACK COVER,22WF/FS/MKII,COOL GREY PC 266.15 1350 3593031200004893 BACK COVER,5448QST,COOL GREY PC 227.32 1500 3409801200012961 BACK COVER,HY22F08,BLACK PC 254.18 1300 3304341200001382 BACK COVER,HY29FW01 COOL GREY PC 397.43 830.3 3299801200003591 BACK COVER,22SL/NP,COOL GREY PC 223.25 1465 3270351200006485 BACK COVER,CT1416,NEW,COOL GREY PC 148.41 2200 3265021200001799 BACK COVER,5512/5438QS,HIPS MIDDLE GREY PC 213.77 1500 3206551200004991 BACK COVER,CT-1500,COOL GRAY PC 123.85 2550 3158181200001796 BACK COVER,5501/2/FU21,HIPS BLACK PC 231.2 1350 3121201200001821 BACK COVER,HR29/HY29/29X50,HIPS M GREY PC 385.54 792 305342
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ICFAI Business School-Hyderabad
1200008816 BACK COVER,3653QSP,SANSUI BLACK PC 132.98 2200 2925561200004990 BACK COVER15TFT,CT1500/15F10TEV,HIPS MGY PC 101.66 2850 2897311200006125 BACK COVER,14"CON 12,NEW BACK,HIPS L GY PC 126.9 2200 2791801200012963 BACK COVER,HY22F08,HIPS BLACK PC 212.69 1300 2764971200011319 BACK COVER,HY25F01,COOL GREY PC 300.86 825 2482101200001788 BACK COVER,21X50/HR2000/HY22,HIPS M GREY PC 276.56 880.9 243614
1200001789 BACK COVER,3610R/3643QS,HIPS BLACK PC 107.79 2200 237138
1200001370 BACK COVER,FIRST20,COOL GREY PC 194.94 1200 233928
1200000655 BACK COVER,1403/14BS,SUP 14,HIPS,L GREY PC 119.18 1899 226342
1200011323 BACK COVER,HY25F01,HIPS MIDDLE GREY PC 271.24 825 223773
1200001371 BACK COVER,FIRST20,HIPS LIGHT GREY PC 178.38 1200 2140568408689
BUFFER 1300001227 BUFFER,THERMOCOLE,SET,B2B21/22NP/22SL PC 68.17 6425 4379921300000740 BUFFER,THERMOCOLE,SET,5438QS PC 57.94 2927 1696001300001414 BUFFER,THERMOCOLE,SET,CT-1500 PC 35.94 3494 1255671300001176 BUFFER,THERMOCOLE,SET,5143QSR PC 88.95 1300 1156351300001224 BUFFER,THERMOCOLE,SET,HY22F01,NEWBACK PC 69.4 1600 111040
1300000755 BUFFER,THERMOCOLE,SET,FIRST20/CP20F PC 40.79 2564 104604
1300000742 BUFFER,THERMOCOLE,SET,5502QS PC 67.91 1350 91679
1300000735 BUFFER,THERMOCOLE,SET,3643QS PC 39.6 2200 871201243237
PACKING BOX
1300001168 BOX,PACKING,5PLY,CTV22NP,POC1D PC 108.11 2600 281086
1300002493BOX,PACKING,5PLY,BROWN,PURE MONO,5453QSP PC 105.32 2295 241749
1300002762 BOX,PACKING,5PLY,3653QSPP,PURE MONO PC 59.65 4010 239211
1300002932 BOX PACKING,5PLY,HY22F07 PC 107.1 2178 233267
1300003726 BOX PACKING,5PLY,FIRST20DP-P,NEW GRAPHIC PC 69.93 3263 228175
1300002400 BOX,PACKING,5PLY,IS15,INTER. SERIES PC 50.85 4486 228113
1300003268 BOX PACKING,5PLY,HY22F08,POC PC 107.08 1668 178641
1300001354 BOX,PACKING,5PLY,HY21C01 PC 106.88 1500 160320
1300002401 BOX,PACKING,5PLY,IS22,INTER. SERIES PC 105.41 1492 157252
1300000632 BOX,PACKING,5PLY,5502QST PC 108.22 1350 146097
1300003732BOX PACKING,5PLY,SY21SUPEREYEP,NEW GRAPH PC 101.35 1375 139352
2233262SPEAKER
1100001799 SPEAKER,55X153MM,8E,20W PC 35.86 14140 5070601100001804 SPEAKER,T,60MM,RND,6E,15W,FL LENGTH LESS PC 20.43 19540 3992021100001801 SPEAKER,57X127MM,8E,20W,120Hz PC 30.37 8660 2629931100004296 SPEAKER,50X120MM,8E,15W PC 27.87 8950 2494371100008303 SPEAKER,76X127MM,16E,5W, MONO PC 26.82 8865 237762
1100001795 SPEAKER,100MM,SQUARE,8E,25W,HARDROCK21 PC 54.73 3600 197028
1100004303 SPEAKER,57X127MM,16E,5W PC 21.46 7400 158804
1100001797 SPEAKER,50X120MM,16E,5W,FIRST20 PC 30.51 4955 151167
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ICFAI Business School-Hyderabad
2163454TUNER
1100004526 TUNER,EWT-5F3T1-E09W-1,FS TYPE,GDC,TEXA PC 63.73 21450 13670091100015795 TUNER,GDC,FS,EWT-5F3T1-F09W-2 PC 65.63 2125 139464
1506472REMOTE
1100003774 REMOTE HANDSET,POC1,H.E,SP1-02,SANSUI PC 44.96 4672 210044
1100014958 REMOTE HANDSET,H-EK2,SHE PC 44.51 4445 197849
1100014882 REMOTE HANDSET,V(EK2)-LE PC 26.66 7400 197284
1100003775 REMOTE HANDSET,POC1,L.E.,SP1-01,SANSUI PC 43.59 3994 174105
1100001694 REMOTE HANDSET,TSB2,HYU-003,HYUNDAI PC 45.13 2497 112675
1100003776 REMOTE HANDSET,VP1-01, POC1 VIDEOCON PC 37.69 2966 1118071003764
SMPS 1100004241 SMPS,FERRITE CORED,TM0065-0L PC 34.08 13125 447300
1100004238 SMPS,FERRITE CORED,13.5V,TM0148-0L,MO PC 30.18 7651 230916
1100019126 TRANSISTOR,2SC4458,SMPS,PREFORMED PC 17.81 8533 151971
1100004237 SMPS,FERRITE BEAD,18.5V,TSB2,TXXX0080 PC 29.89 3131 93596923782
FBT 1100011384 FBT,20",TF-107-2B,WTH BLEEDR RES,KNOT PC 75.17 10250 770493
1100003298 FBT,FERRITE CORED14",TF-0126-OU,KNOTTING PC 75.63 8913 674101
1100003301 FBT,FERRITE CORED,21"TSB2,BSC24-01N4013E PC 76.71 4799 3681171812711
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ICFAI Business School-Hyderabad
Production plan:
69
ICFAI Business School-Hyderabad
For September,06
CT-14MN 700
BRANCHES KAIL3653QSPP 30005153QSP 800IS 15 450015X-50 20022NP 3500IS 22 14005502QST 90021X-50WT 2005505QS 40021X-50 500IS 29G 40029X-50 2007642G 150TOTAL VIDEOCON 16150SY -14- SUPER EYE 1850SY - 21- SUPER EYE 400FIRST 14 DP 350FIRST 20 DP 600HR-15 400K2K-15 800B2B-15 450S2S-15 400FURATTO 21 EYE 100HARD ROCK 21 EYE 350B2B-21 700S2S-21 450HARDROCK 2000 500HARDROCK-2KWT 250K2K-21 1200SLIM EX 214 100PJ-29-M 100PJ-29-M - WT 150HARD ROCK 29 150HARD ROCK 29 WT 200SLIMEX-291 50B2B-29 +DVD 510 200GRAND HYUNDAI 9750
70
ICFAI Business School-Hyderabad
CT1416 300CT15NS 200CT1500 100CT20MN 300CT22NS 400CT2202 300CT2205 300CT22WF 250CT2902 100CT2929 100TOTAL AKAI 305015F03 120015F04 190021C01 100022F01T 40022FW01T 45022F08 200022F03 15022F06 25022F07 280029F04G 45029FW01G 250TOTAL SANSUI 10850
Rejection percentages of Picture Tube:
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ICFAI Business School-Hyderabad
REFERENCES:
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ICFAI Business School-Hyderabad
Bibliography:
Working capital management-V.K Bhalla
Production and operations management-manufacturing and services-Chase, Richard B, Nicolas, J Aquilano and F Robert Jacobs
Supply Chain Management-Sunil Chopra
Principles of Inventory and Material Management-Teresine, Richard J.
Websites:
www.effectiveinventory.com
www.inventoryops.com
www.inventoryanalytics.com
www.inventorymanagement.com
www.themanager.org
www.apics.com
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